Wednesday, September 12, 2012

RBI Introduces New Rating System To Rate A Bank

RBI sets stage for a bank supervision overhaul
CAMELS set to give way to a more forward-looking rating system the central bank seeks cooperation from overseas regulators
 (Collected from Business Standard )
Manojit Saha / Mumbai Sep 13, 2012, 00:25 IST

The Reserve Bank of India (RBI) has decided to change the way it monitors and supervises banks in order to make the process more forward-looking. The move comes against the backdrop of the risks that have emerged after the global financial crisis of 2008, with lenders shifting from offering traditional products to more complex ones.

The country’s financial sector would now be evaluated under a dynamic risk-based mechanism, an aspect the present CAMELS rating system lacked, central banking sources said. RBI proposes to replace CAMELS with INROADS (Indian Risk-Oriented and Dynamic Rating System) from the next round of annual financial inspection, in 2013.

 At present, the central bank uses the CAMELS (Capital adequacy, Asset quality, Management, earnings, Liquidity, and Systems and control) method, to assign ratings to Indian banks. CAMELS, which goes from A+ to D is assigned to a bank while finalising the annual financial inspection (AFI) report.
The changing landscape of banking supervision
  • CAMELS rating system to be phased out, as it lacks forward-looking assessment and merely represents banks’ performance
  • New system, INROADS, to capture the risks that may cause a bank to fail
  • Annual Financial Inspection report to be fast-tracked
  • Single-point contact at RBI to bridge regulatory gap
  • Information-sharing agreements with overseas regulators on cards

RBI has argued that the present form of rating captures only a few risk elements and represents a bank’s past-year performance. Besides, RBI is of the view, the present rating does not capture the risks that could cause a bank to fail.

According to sources, some of the broader risks, such as credit risk, operational risk, and strategic and business group risk, increase the probability of a bank’s failure.

In addition, the process of annual financial inspection has been expedited and it is now proposed that banks should address the areas of concern mentioned in AFI during a particular year. In a given year, AFI is undertaken for the previous year, and significant delays were noticed last year.

A high-level steering committee for the review of supervisory processes for banks, set up by RBI under the chairmanship of Deputy Governor K C Chakrabarty, has suggested the changes in the supervisory approach. Most of the suggestions have been accepted by the central bank.

The banking regulator is also entering into mutual regulatory cooperation agreements with regulators of other countries to extract information about Indian banks operating overseas and vice versa. RBI has already signed an agreement with 14-15 countries and is in talks with the US – a country where a majority of Indian banks have presence. Sources said since the US had three federal banking supervisors, the process might take some time.

The central bank is also planning to create a single-point contact for each bank in order to plug the regulatory lacuna. “It is quite often the case that information about a bank with one department of RBI is not known to other departments. So, a single-point contact will be created for each banks,” a source said.

Defaulting firms will lose bank guarantee 

( Collected from THE HINDU)

IMG has shortlisted 18 mining companies for action under bank guarantee norms
Apart from facing de-allocation of coal mines in view of poor progress of work in the coal blocks allocated to them, defaulting companies will also be faced with a loss of their bank guarantees (BG) furnished by them at the time of allocation. The IMG has short listed around 18 coal mining companies for action under the guidelines for bank guarantee deduction.

The Inter-Ministerial Group (IMG) headed by Zohra Chatterjee have given a final shape to the Bank Guarantees guidelines which will now result in performance linked encashment of BGs furnished by these companies. The deduction of the bank guarantee will be on the basis of milestones achieved on ground and the rating given by the IMG for various works. The IMG has worked out a 100 mark index under which companies would be given marks for various milestones achieved like submission of mining plan and approval of mining plan which will carry the highest 10 marks each, application for forest clearance and land acquisition will carry 8 marks each and similarly other criteria like grant of forest clearance, obtaining of mining lease and so on.

The delay in developing of particular block could result in a deduction of bank guarantee to the tune of 50 per cent and if no work has been done then it could be both cancellation of the block and deduction of bank guarantee. The IMG has identified around 18 companies who have defaulted on various fronts and a decision on their bank guarantee will only be taken after proper scrutiny of their cases which has been done now by the IMG. “The IMG will now recommend to the Coal Ministry the necessary action in all such cases and then only formal orders would be issued for doing the needful,’’ a senior Coal Ministry official remarked.

The guidelines further state that where allocate companies have exceeded their normative date of production and there is no provision for bank guarantee related to development of coal blocks, the IMG may, only in cases where it finds that the company has made substantial progress and investment in development of the block even through they have exceeded normative date of production, recommend imposition of bank guarantee in addition to any other action. “The IMG, while making recommendations, will take into consideration the terms and conditions of allocation letter and the facts and circumstances of each case,’’ the guidelines state.

The documents indicating current status duly certified by the authorised representative (duly authenticated documents supporting the status shown may be kept available for the perusal of IMG, if required). Details of investment made vis-à-vis the planned investment in development of a coal block duly certified by the Chartered Accountant; Investment in respect of end use plant may be separately indicated with due certification; progress of implementation of end use plant and the latest status of the development of block/ end use plant prepared by the Coal Controller shall also be taken into consideration, the guidelines state.

The IMG had issued show cause notices to a nearly 58 companies including Reliance Power, Tatas, Essar, ArcelorMittal, GVK Power, Hindalco, Grasim Industries, JSW, Jindal Steel and Power Limited and Bhushan Steel. A total of 195 blocks stand allocated as on date and out of the above 30 blocks have started production and it is expected that 8 more blocks are likely to come into production during the year.

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